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The insurance sector in India has come a full circle from being an
open competitive market to nationalization and back to a liberalized
market again.

Tracing the developments in the Indian insurance sector reveals the 360-degree turn witnessed over a period of almost 190 years.

The
business of life insurance in India in its existing form started in
India in the year 1818 with the establishment of the Oriental Life
Insurance Company in Calcutta.

Some of the important milestones in the life insurance business in India are:

1912 - The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business.

1928
- The Indian Insurance Companies Act enacted to enable the government
to collect statistical information about both life and non-life
insurance businesses.

1938 - Earlier legislation consolidated and
amended to by the Insurance Act with the objective of protecting the
interests of the insuring public.

1956 - 245 Indian and foreign
insurers and provident societies taken over by the central government
and nationalized. LIC formed by an Act of Parliament, viz. LIC Act,
1956, with a capital contribution of Rs. 5 crore from the Government of
India.

The General insurance business in India, on the other
hand, can trace its roots to the Triton Insurance Company Ltd., the
first general insurance company established in the year 1850 in Calcutta
by the British.

Some of the important milestones in the general insurance business in India are:

1907 - The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes of general insurance business.

1957
- General Insurance Council, a wing of the Insurance Association of
India, frames a code of conduct for ensuring fair conduct and sound
business practices.

1968 - The Insurance Act amended to regulate
investments and set minimum solvency margins and the Tariff Advisory
Committee set up.

1972 - The General Insurance Business
(Nationalization) Act, 1972 nationalized the general insurance business
in India with effect from 1st January 1973.

107 insurers
amalgamated and grouped into four companies viz. the National Insurance
Company Ltd., the New India Assurance Company Ltd., the Oriental
Insurance Company Ltd. and the United India Insurance Company Ltd. GIC
incorporated as a company.

The economic liberalisation in India refers to ongoing economic reforms in India that
started on 24 July 1991. After Independence in
1947, India
adhered to socialist policies. Attempts were made to liberalise the economy in
1966 and 1985. The first attempt was reversed in 1967. Thereafter, a stronger
version of socialism was adopted. The second major attempt was in 1985 by prime
minister Rajiv Gandhi. The process came to a halt in 1987, though 1966 style
reversal did not take place.

In 1991, after India
faced a balance of payments crisis, it had to pledge 20 tonnes of gold to Union
Bank of Switzerland
and 47 tonnes to Bank of England as part of a bailout deal with the International
Monetary Fund (IMF). In addition, the IMF required India to undertake a series of
structural economic reforms. As a result of this requirement, the government of
P. V. Narasimha Rao and his finance minister Manmohan Singh (currently the
Prime Minister of India) started breakthrough reforms, although they did not
implement many of the reforms the IMF wanted.

The new neo-liberal policies included opening for
international trade and investment, deregulation, initiation of privatisation,
tax reforms, and inflation-controlling measures. The overall direction of
liberalisation has since remained the same, irrespective of the ruling party,
although no party has yet tried to take on powerful lobbies such as the trade
unions and farmers, or contentious issues such as reforming labour laws and
reducing agricultural subsidies. Thus, unlike the reforms of 1966 and 1985 that
were carried out by the majority Congress governments, the reforms of 1991
carried out by a minority government proved sustainable. There exists a lively
debate in India
as to what made the economic reforms sustainable.

The fruits of liberalisation reached their peak in
2007, when India
recorded its highest GDP growth rate of 9%. With this, India became the second fastest growing major economy
in the world, next only to China.
The growth rate has slowed significantly in the first half of 2012. An
Organisation for Economic Co-operation and Development (OECD) report states
that the average growth rate 7.5% will double the average income in a decade,
and more reforms would speed up the pace.

Indian government coalitions have been advised to
continue liberalisation. India
grows at slower pace than China,
which has been liberalising its economy since 1978. The McKinsey Quarterly
states that removing main obstacles "would free India's
economy to grow as fast as China's,
at 10% a year".

There has been significant debate, however, around
liberalisation as an inclusive economic growth strategy. Since 1992, income
inequality has deepened in India with consumption among the poorest staying
stable while the wealthiest generate consumption growth.As India's Gross
domestic product (GDP) growth rate became lowest in 2012-13 over a decade,
growing merely at 5%, more criticism of India's economic reforms surfaced, as
it apparently failed to address employment growth, nutritional values in terms
of food intake in calories, and also exports growth - and thereby leading to a
worsening level of current account deficit compared to the prior to the reform
period.

For 2010, India
was ranked 124th among 179 countries in Index of Economic Freedom World
Rankings, which is an improvement from the preceding year.

Pre-liberalisation policies

Indian economic
policy after independence was influenced by the colonial experience (which was
seen by Indian leaders as exploitative in nature) and by those leaders'
exposure to Fabian socialism. Policy tended towards protectionism, with a
strong emphasis on import substitution, industrialisation under state
monitoring, state intervention at the micro level in all businesses especially
in labour and financial markets, a large public sector, business regulation,
and central planning. Five-Year Plans of India resembled central planning in
the Soviet Union. Steel, mining, machine
tools, water, telecommunications, insurance, and electrical plants, among other
industries, were effectively nationalised in the mid-1950s.Elaborate licences,
regulations and the accompanying red tape, commonly referred to as Licence Raj,
were required to set up business in India between 1947 and 1990.

Before the process of reform began in 1991, the
government attempted to close the Indian economy to the outside world. The
Indian currency, the rupee, was inconvertible and high tariffs and import
licencing prevented foreign goods reaching the market. India also
operated a system of central planning for the economy, in which firms required
licences to invest and develop. The labyrinthine bureaucracy often led to
absurd restrictions—up to 80 agencies had to be satisfied before a firm could
be granted a licence to produce and the state would decide what was produced,
how much, at what price and what sources of capital were used. The government
also prevented firms from laying off workers or closing factories. The central
pillar of the policy was import substitution, the belief that India needed to
rely on internal markets for development, not international trade—a belief
generated by a mixture of socialism and the experience of colonial
exploitation. Planning and the state, rather than markets, would determine how
much investment was needed in which sectors.

In the 80s, the government led by Rajiv Gandhi started
light reforms. The government slightly reduced Licence Raj and also promoted
the growth of the telecommunications and software industries.The Vishwanath
Pratap Singh (1989–1990) and Chandra Shekhar Singh government (1990–1991) did
not add any significant reforms.

Impact

The low annual growth rate of the economy of India
before 1980, which stagnated around 3.5% from 1950s to 1980s, while per
capita income averaged 1.3%. At the same time, Pakistan
grew by 5%, Indonesia
by 9%, Thailand by 9%, South Korea by 10% and Taiwan by
12%.

Only four or five licences would be given for
steel, electrical power and communications. Licence owners built up huge
powerful empires.

A huge private sector emerged. State-owned
enterprises made large losses.

Income Tax Department and Customs Department
became efficient in checking tax evasion.

Infrastructure investment was poor because of the
public sector monopoly.

Licence Raj established the "irresponsible,
self-perpetuating bureaucracy that still exists throughout much of the
country" and corruption flourished under this system.

Narasimha Rao government (1991–1996)

The assassination of prime minister Indira Gandhi in
1984, and later of her son Rajiv Gandhi in 1991, crushed international investor
confidence on the economy that was eventually pushed to the brink by the early
1990s.

As of 1991, India still had a fixed exchange
rate system, where the rupee was pegged to the value of a basket of currencies
of major trading partners. India
started having balance of payments problems since 1985, and by the end of 1990,
it was in a serious economic crisis. The government was close to default, its
central bank had refused new credit and foreign exchange reserves had reduced
to the point that India
could barely finance three weeks’ worth of imports. Most of the economic
reforms were forced upon India
as a part of the IMF bailout.

A Balance of Payments crisis in 1991 pushed the country
to near bankruptcy. In return for an IMF bailout, gold was transferred to London as collateral, the rupee devalued and economic
reforms were forced upon India.
That low point was the catalyst required to transform the economy through badly
needed reforms to unshackle the economy. Controls started to be dismantled,
tariffs, duties and taxes progressively lowered, state monopolies broken, the
economy was opened to trade and investment, private sector enterprise and competition
were encouraged and globalisation was slowly embraced. The reforms process
continues today and is accepted by all political parties, but the speed is
often held hostage by coalition politics and vested interests.

— India
Report, Astaire Research

Later reforms

The Bharatiya Janata Party (BJP)-Atal Bihari
Vajpayee administration surprised many by continuing reforms, when it was
at the helm of affairs of India
for five years.

The BJP-led National Democratic Alliance
Coalition began privatising under-performing government owned business
including hotels, VSNL, Maruti Suzuki, and airports, and began reduction
of taxes, an overall fiscal policy aimed at reducing deficits and debts
and increased initiatives for public works.

The United Front government attempted a
progressive budget that encouraged reforms, but the 1997 Asian financial
crisis and political instability created economic stagnation.

Towards the end of 2011, the Government initiated
the introduction of 51% Foreign Direct Investment in retail sector. But
due to pressure from fellow coalition parties and the opposition, the
decision was rolled back. However, it was approved in December 2012.

Impact of reforms

The impact of these reforms may be gauged from the fact
that total foreign investment (including foreign direct investment, portfolio
investment, and investment raised on international capital markets) in India
grew from a minuscule US$132 million in 1991–92 to $5.3 billion in
1995–96.

Cities like Chennai, Bangalore,
Hyderabad, NOIDA, Gurgaon, Gaziabad, Pune,
Jaipur, Indore
and Ahmedabad have risen in prominence and economic importance, become centres
of rising industries and destination for foreign investment and firms.

Annual growth in GDP per capita has accelerated from just
1¼ per cent in the three decades after Independence
to 7½ per cent currently, a rate of growth that will double average income in a
decade. In service sectors where government regulation has been eased
significantly or is less burdensome—such as communications, insurance, asset
management and information technology—output has grown rapidly, with exports of
information technology enabled services particularly strong. In those
infrastructure sectors which have been opened to competition, such as telecoms
and civil aviation, the private sector has proven to be extremely effective and
growth has been phenomenal.

Election of AB Vajpayee as Prime Minister of India in
1998 and his agenda was a welcome change. His prescription to speed up economic
progress included solution of all outstanding problems with the West (Cold War
related) and then opening gates for FDI investment. In three years, the West
was developing a bit of a fascination to India's brainpower, powered by IT
and BPO. By 2004, the West would consider investment in India, should
the conditions permit. By the end of Vajpayee's term as prime minister, a
framework for the foreign investment had been established. The new incoming
government of Dr. Manmohan Singh in 2004 is further strengthening the required
infrastructure to welcome the FDI.

Today, fascination with India
is translating into active consideration of India as a destination for FDI. The
A T Kearney study is putting India
second most likely destination for FDI in 2005 behind China. It has
displaced US to the third position. This is a great leap forward. India was at
the 15th position, only a few years back. To quote the A T Kearney Study “India's strong
performance among manufacturing and telecom & utility firms was driven
largely by their desire to make productivity-enhancing investments in IT,
business process outsourcing, research and development, and knowledge
management activities”.

Ongoing economic challenges

Problems in the agricultural sector.

Highly restrictive and complex labour laws.

Inadequate infrastructure, which is often
government monopoly.

Inefficient public sector.

Inflation in basic consumable goods.

Increasing Gap Between the Lower and Upper
Classes.

Corruption

High fiscal deficit

Stagnant export and increasing Imports.

In labour markets, employment growth has been
concentrated in firms that operate in sectors not covered by India's highly
restrictive labour laws. In the formal sector, where these labour laws apply,
employment has been falling and firms are becoming more capital intensive
despite abundant low-cost labour. Labour market reform is essential to achieve
a broader-based development and provide sufficient and higher productivity jobs
for the growing labour force. In product markets, inefficient government
procedures, particularly in some of the states, acts as a barrier to
entrepreneurship and need to be improved. Public companies are generally less
productive than private firms and the privatisation programme should be revitalised.
A number of barriers to competition in financial markets and some of the
infrastructure sectors, which are other constraints on growth, also need to be
addressed. The indirect tax system needs to be simplified to create a true
national market, while for direct taxes, the taxable base should be broadened
and rates lowered. Public expenditure should be re-oriented towards
infrastructure investment by reducing subsidies. Furthermore, social policies
should be improved to better reach the poor and—given the importance of human
capital—the education system also needs to be made more efficient.

Reforms at the state level

At the state level, economic performance is much better
in states with a relatively liberal regulatory environment than in the relatively
more restrictive states".

The analysis of this report suggests that the differences
in economic performance across states are associated with the extent to which
states have introduced market-oriented reforms. Thus, further reforms on these
lines, complemented with measures to improve infrastructure, education and
basic services, would increase the potential for growth outside of agriculture
and thus boost better-paid employment, which is a key to sharing the fruits of
growth and lowering poverty.